Tesserent Limited Financial Report FY17 Signed

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TESSERENT LIMITED AND CONTROLLED ENTITIES

FINANCIAL REPORT30TH JUNE 2017

ABN: 13 605 672 928

Tesserent Limited Financial Report 2017

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CONTENTS

DIRECTORS’ REPORT ............................................................................................................................ 3 REMUNERATION REPORT – AUDITED .............................................................................................. 11 AUDITOR’S INDEPENDENCE DECLARATION ................................................................................... 21 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME.............................. 22 STATEMENT OF FINANCIAL POSITION ............................................................................................. 23 STATEMENT OF CHANGES IN EQUITY .............................................................................................. 25 STATEMENT OF CASH FLOWS ........................................................................................................... 26 NOTES TO THE FINANCIAL STATEMENTS ....................................................................................... 27 1. Introduction to the Report ............................................................................................................ 27 2. Business Result for the Year ........................................................................................................ 29

2.1 Segment information .................................................................................................................. 29 2.2 Revenue ....................................................................................................................................... 31 2.3 Loss for the year ......................................................................................................................... 32 2.4 Earnings per share ...................................................................................................................... 32 2.5 Business combinations .............................................................................................................. 33 2.6 Taxation ........................................................................................................................................ 36

3. Operating Assets and Liabilities .................................................................................................. 39 3.1 Trade and other receivables ...................................................................................................... 39 3.2 Trade and other payables ........................................................................................................... 40 3.3 Provisions .................................................................................................................................... 40 3.4 Contingent liabilities ................................................................................................................... 41 3.5 Plant and equipment ................................................................................................................... 41 3.6 Intangibles ................................................................................................................................... 43 3.7 Inventory ...................................................................................................................................... 46

4. Capital Management ...................................................................................................................... 46 4.1 Borrowings .................................................................................................................................. 46 4.2 Financial risk management ........................................................................................................ 46 4.3 Cash and cash equivalents ........................................................................................................ 48 4.4 Contributed equity ...................................................................................................................... 48 4.5 Commitments .............................................................................................................................. 50 4.6 Dividends ..................................................................................................................................... 50

5. Other ............................................................................................................................................... 50 5.1 Related party transactions ......................................................................................................... 50 5.2 Reserves ...................................................................................................................................... 54 5.3 Parent entity information ............................................................................................................ 54


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5.4 Remuneration of auditors .......................................................................................................... 55 5.5 Cash flow information ................................................................................................................ 55 5.6 Events occurring after the reporting period ............................................................................. 56

DIRECTORS’ DECLARATION .............................................................................................................. 57 INDEPENDENT AUDITOR’S REPORT ................................................................................................. 58


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DIRECTORS’ REPORT

Your directors present their report on the consolidated entity (referred to herein as “the Group” or “Tesserent”) consisting of Tesserent Limited and its controlled entities for the financial year ended 30 June 2017.

1. Directors

The following persons were directors of Tesserent Limited during the whole of the financial year and up to the date of this report, unless otherwise stated:

Russell Yardley

Keith Glennan

Gregory Baxter

Stefano (Steve) Bertamini

Paul Brandling

2. Information on Directors

Russell Yardley – Non-Executive Chairman

Qualifications – BSc FAICD

Experience – Appointed Chair in 2015. Russell has over 35 years of entrepreneurial and corporate experience in the IT sector having started his career with IBM in 1978. He founded his first company in 1985 which was one of Australia’s first multimedia businesses and began internet application development in 1994. As well as being the Chairman of the Company’s Board, Russell is a non-executive director and chairman for a number of organisations including: Chairman Powerhouse Ventures Limited (ASX:PVL), Chairman National eResearch Collaboration and Tools project for the Federal Government, Wunderman Australia, Bienalto, The Resolution, Algonquin Investments, the Victorian Government Purchasing Board and the Alannah and Madeline Foundation. In 2010 he was elected an Honorary Member of the Australian Computer Society, from 2011- 2014 he was a National Board member and Treasurer of the Australian Information Industry Association and was made a Fellow of the Australian Institute of Company Directors in 2011.

Directorships held in other listed entities during the three years prior to the current year

– Chairman Powerhouse Ventures Limited

Keith Glennan – Managing Director

Qualifications – B. Tech, MACS, MAICD

Experience – Board member since 2015, Managing Director of Tesserent Australia Pty Ltd (a subsidiary of Tesserent Limited) since 2012. Keith has been working in the IT industry for three decades, and has worked in Australia and the United States for companies such as Hewlett Packard and IBM. He has been involved in the managed security industry since 2002. In late 2012 Keith acquired control of and took the Managing Director role at Tesserent Australia. In this position he formulated the strategy of developing the MSSP Platform and the current business strategy.


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DIRECTORS’ REPORT

Special Responsibilities – Chief Executive Officer


– None

Gregory Baxter – Non-Executive Director

Qualifications – BSc MBA

Experience – Board member since 2015. Gregory is currently Chief Digital Officer at MetLife. Previously he was Global Head of Digital at Citibank, leading Citi’s digital transformation across businesses and geographies. He specialises in the development and delivery of digital strategy, corporate innovation and business transformation. He has held senior business, consulting and technology roles across Asia, Europe and North America, with a track record of high-impact business results. Previously Gregory was a Partner and U.K. Board member at Booz & Company (formerly Booz Allen Hamilton), where he held leadership roles across the financial services, public sector and digital practices. Prior to this he was a senior project and product manager with IBM, delivering large scale systems integration projects in financial services and managing the product lifecycle of leading market solutions. He is a regular speaker on digital strategy and technology, and the impact of disruptive innovation on business. Gregory is a council (board) member of Chatham House (Royal Institute of International Affairs), a leading international affairs think tank. He holds a BSc from Monash University and a MBA from the University of Melbourne, and has been a guest lecturer on strategy at the University of Oxford, New York University, and American University (Washington).


– None

Stefano (Steve) Bertamini – Non-Executive Director

Qualifications – BBA MBA

Experience – Board member since 2015. Steve is currently Chief Executive Officer of Al Rajhi Bank, a bank with total assets in excess of US$90 billion. Steve previously held the position of Group Executive Director and CEO for Global Consumer Banking at Standard Chartered Bank.

Prior to this Steve’s roles included: x Group Executive Director and CEO Consumer Banking at

Standard Chartered Bank; x Chairman & Chief Executive Officer of GE North East

Asia; x Chief Executive Officer and President of GE (China) Co.

Ltd; x Chief Executive Officer of GE Australia and New Zealand;


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DIRECTORS’ REPORT x President of GE Capital Asia; and x Managing Director of GE’s Consumer Finance business in

Asia.

Steve has a BBA, Finance and Management from The University of Texas at Austin and an MBA, Finance and International Banking from University of North Texas.


– None

Paul Brandling – Non-Executive director

Qualifications – BSc (Hons), MAICD

Experience – Board member since 2015. Paul has over 30 years experience in the Information Technology industry. He was Vice President and Managing Director of Hewlett Packard South Pacific from 2002-2012 and prior to that was Vice President and Managing Director of Compaq Computer South Pacific. Paul was an elected National Board Director of the Australian Information Industry Association (AIIA) from 2002-2011 and a member of the International CEO Forum from 2001-2012. He is currently a Non-Executive Director of ASX listed software companies Integrated Research Limited and Infomedia Limited. Previously he was a Non-Executive Director of Amcom Communications Limited and Vocus Communications Limited. Paul holds a BSc (Hons), Mechanical Engineering from Aston University and is a current member of the Australian Institute of Company Directors.


– Previously held directorships in Vocus Communications Limited and Integrated Research Limited.

3. Directors’ Shareholdings

The table below sets out each Director’s relevant interest in shares or options of the Company at the date of this report:

Director Number of ordinary

shares Number of options

Russell Yardley 641,666 3,000,000

Keith Glennan 31,711,435 -

Gregory Baxter 1,200,000 1,500,000

Stefano (Steve) Bertamini 1,200,000 1,500,000

Paul Brandling 1,200,000 1,500,000

Total 35,953,101 7,500,000

4. Company Secretary

Oliver Carton BJuris LLB was appointed Company Secretary on 6 May 2015.

Oliver is a qualified lawyer with over 28 years’ experience in a variety of corporate roles. He currently runs his own


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DIRECTORS’ REPORT consulting business, and was previously a Director of the Chartered Accounting firm KPMG where he managed its Corporate Secretarial Group. Prior to that, he was a senior legal officer with ASIC.

5. Directors’ Meetings

The table below sets out the number of meetings held during the 2017 financial year and the number of meetings attended by each Director. During the year, 8 Board meetings were held.

Director Eligible to attend

Attended

Russell Yardley 8 8

Keith Glennan 8 8

Gregory Baxter 8 8

Stefano (Steve) Bertamini 8 7

Paul Brandling 8 8

At the February 2017 Board meeting, the Board resolved to form an Audit and Risk Committee and a Remuneration and Nominations Committee as sub committees of the Board. Membership of these committees was restricted to Non-executive directors and confirmed at the March Board meeting as follows:

Directors Audit and Risk Committee

Remuneration and Nominations Committee

Russell Yardley Member Member

Gregory Baxter - Chair

Stefano (Steve) Bertamini Chair -

Paul Brandling Member Member

No sub committee meetings were held during the FY2017

6. Review of Operations

Principal activities

Tesserent provides Internet Security-as-a-Service to a wide range of Australian and international customers, including education providers, corporate enterprises, and government customers. Security-as-a-Service packages security services for a customer’s computer infrastructure, including firewall, authentication, anti-virus, anti-malware/spyware, intrusion detection, and security event management, amongst other services. These services are provided on the basis of a subscription fee, most commonly as monthly or annual fees. This revenue model delivers recurring revenues to Tesserent.

Tesserent has also appointed a number of international resellers (Channel partners) that licence the MSSP Platform to deliver Security-as-a-Service to their own customers.

Group financial performance

The Group recorded a loss after tax of $3,464,036 for the year ended 30 June 2017 (2016: $218,654 loss). FY2017 was an eventful year for Tesserent. Being our first full financial year as a listed company, we engaged in a number of key activities to establish our business, build competency for future growth, optimise the return on company assets, assess and develop new market opportunities, whilst continuing to grow revenue. Tesserent’s FY2017 revenue of $5.40M represents year-on-year revenue growth of 13.7%, and is representative of a solid business experiencing transformation. Whilst investing in business development initiatives, the


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DIRECTORS’ REPORT establishment of Tesserent’s executive management team and the evaluation of emerging market opportunities, Tesserent continued to grow our revenue year-on-year by signing long-term customer contracts (typically 3 years) locking in annuity revenue for the years ahead. A highlight of FY2017 was the sale of the Sonar/MyNet Intellectual Property and as a separate transaction the associated customer contracts to Family Zone Cyber Security Limited (ASX:FZO). Tesserent acquired the intellectual property and customer contracts as part of the Blue Reef Pty Ltd (Blue Reef) business acquisition in FY2016. Tesserent acquired Blue Reef customers and assets (including Sonar/MyNet Intellectual Property) for $2.83M consisting of $1M cash and 12.9M fully paid ordinary Tesserent shares. In less than a year, Tesserent sold the Sonar/MyNet Intellectual Property to FZO for a total of $3.69M, incorporating $3.25M cash and $0.44M in FZO shares that have subsequently been sold. This transaction effectively netted Tesserent $2.69M in cash, relieved Tesserent of the heavy costs associated with developing the Sonar/MyNet software and significantly reduced our staff costs. From a profit or loss perspective Tesserent realised a gain of $571,794 on the sale of the Intellectual Property and a gain of $569,694 on the sale of the customer contracts. In conjunction with revenue growth, management of personnel and other costs remains a key focus of the Board and Executive team. In conserving cash flow while recruiting and retaining key operational staff the Group had previously implemented an employee share plan that, while contributing $0.69m to employee and director costs, had no impact on cash flow. Tesserent recognises that product development and business growth requires investment, and this is reflected in increased costs during FY2017 compared to FY2016 for items such as occupancy costs, where we built a world class Security Operations Centre to support our clients. However, while the Group has invested and will continue to invest in new product development and new business, Tesserent notes that the focus on costs management and cash conservation resulted in a net cash outflow for the year of $0.52M, and a cash balance at the end of the year of $2.86M. As noted earlier the Group divested of its Sonar/MyNet Intellectual Property, while continuing to develop and leverage relevant key products such as CyberBIZ for our defined markets including Small-Medium-Businesses (SMB). In undertaking this initiative, the Group has been able to strategically streamline development costs that will have a significant impact to FY2018 personnel costs enabling a direct and focussed approach to the ongoing sales and marketing expenditure. Tesserent is committed to growing our business through the optimisation of new and evolving market opportunities. To do this, we cannot simply continue to do what we have done in the past, instead, we must continue to evaluate changing market conditions, keep pace with emerging technologies and satisfy changing market demands. During FY2017 Tesserent formed two strategic partnerships with global vendors (AlienVault and Palo Alto Networks) enabling us to broaden our reach. We also developed CyberBIZ, an innovative and comprehensive security service targeting SMB customers. The SMB market in Australia consists of 1.2M SMBs. This market is under-serviced by managed security service offerings, making CyberBIZ a rich opportunity for Tesserent. Tesserent seeks to execute a direct and channel sales model to promote and sell into this vast market

7. Business Strategies, Prospects and Risks for the Future Financial Years

Tesserent’s strategy includes continued focus on the following areas:

x expanding the number of Channel partners in Australia and internationally;

x increasing the number of direct sales to organisations, in Australian and internationally, through increased sales and marketing;

x assessing acquisition opportunities; and

x ongoing research and development.


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DIRECTORS’ REPORT

8. Subsequent Events

There have been no matters or circumstances other than those referred to in the financial statements or notes to the financial statements that have arisen since the end of the financial year, that have significantly affected, or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years.

9. Changes in State of Affairs

During the financial year, Tesserent completed a the sale of non-core intellectual property and customer contracts which enabled the Group to focus on developing further products to service our existing education, corporate and SMB segments. There were no other significant changes in the state of affairs of the Group other than that referred to in the financial statements or notes thereto.

10. Environmental Factors

Tesserent is not subject to any significant environmental regulation under Australian Commonwealth or State law. Tesserent recognises its obligations to its stakeholders (customers, shareholders, employees and the community) to operate in a way that minimises the impact it has on the environment.

11. Dividends

No dividends were declared or paid during the financial year.

12. Indemnification of Directors, Officers and Auditors

The Directors and Officers of Tesserent Limited are indemnified against liabilities pursuant to agreements with Tesserent Limited. Tesserent Limited has entered into insurance contracts with a third party insurance provider, in accordance with normal commercial practices. Under the terms of the insurance contract, the nature of the liabilities insured against and the amount of premiums paid are confidential. The Group are not aware of any liability that arose under these indemnities as at the date of this report.

During or since the end of financial period, the company has not indemnified or made a relevant agreement to indemnify the auditor against a liability incurred as auditor.

13. Proceedings on Behalf of Company

No person has applied for leave of court to bring proceedings on behalf of the company or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings.

The company was not a party to any such proceedings during the year.

14. Non-audit services

The Board of Directors, is satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the services disclosed below did not compromise the external auditor’s independence, as the nature of the services provided does not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board.


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DIRECTORS’ REPORT

The following fees were paid or payable to BDO East Coast Partnership for non-audit services provided during the year ended 30 June 2017:

2017 2016

$ $

Tax services 99,400 36,215

15. Auditor’s Independence Declaration

The lead auditor’s independence declaration for the year ended 30 June 2017 has been received and can be found on page 21 of the financial report.

16. Options / Deferred shares

At the date of this report, the unissued ordinary shares of Tesserent Limited under option are as follows:

Grant Date Date of Expiry Exercise Price (Cents)

Number under option

17 November 2015 31 August 2019 20 2,500,000

17 November 2015 31 August 2019 24 2,500,000

17 November 2015 31 August 2019 28.8 2,500,000

9 May 2016 8 May 2018 30 500,000

9 May 2016 8 May 2019 40 500,000

9 May 2016 8 May 2020 50 500,000

9,000,000

At the date of this report, the unissued ordinary shares of Tesserent Limited under deferred shares are as follows:

Grant date Vesting date Share price at grant date

Number of deferred shares

9 May 2016 8 May 2018 $0.16 700,000

9 May 2016 8 May 2019 $0.16 700,000

24 November 2016 15 June 2018 $0.14 360,000

24 November 2016 15 June 2019 $0.14 600,000

24 November 2016 3 October 2017 $0.14 300,000



3,860,000


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DIRECTORS’ REPORT

Option and deferred share holders do not have any rights to participate in any issues of shares or other interests of the company or any other entity.

There have been no options granted or deferred shares issued over unissued shares or interests of any controlled entity within the Group during or since the end of the reporting period.

For details of options issued and deferred shares granted to directors and executives as remuneration, refer to the remuneration report.

No person entitled to exercise the option had or has any right by virtue of the option to participate in any share issue of any other body corporate.


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REMUNERATION REPORT – AUDITED Remuneration Policy

The directors present the consolidated entity’s 2017 audited remuneration report which details the remuneration information for Tesserent Limited’s executive director, non-executive directors and other key management personnel.

For the purposes of this report, Key Management Personnel (KMP) are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the business, directly or indirectly, as an executive.

The names and positions of KMP in the Group during the whole of the financial year unless otherwise stated are:

Name Position Appointment Date

Keith Glennan Managing Director

Russell Yardley Non-Executive Chairman

Steve Bertamini Non-Executive Director

Gregory Baxter Non-Executive Director

Paul Brandling Non-Executive Director

Karen Negus Head of Sales and Marketing

David Buerckner Head of Security Operations 3 October 2016

Kurt Hansen1 Global Head of Sales

Nick Conolly2 Chief Technical Officer

1 Resigned 21 March 2017.

2 Resigned 30 November 2016

Principles used to determine nature and amount of remuneration

The broad principles for determining the nature and amount of remuneration of KMP has historically been agreed by the Board, however in March 2017 the Board implemented a Nominations and Remuneration Committee who will undertake this role going forward. This Committee can obtain professional advice where necessary to ensure that the Group attracts and retains talented and motivated directors and employees who can enhance performance through their contribution and leadership. No external advice regarding remuneration policy was obtained in the current year.

The guiding principles for determining the nature and amount of remuneration for KMP of the Group is as follows:

x remuneration should include an appropriate mix of fixed and performance based components,

x components of remuneration should be understandable, transparent and easy to communicate; and

x Remuneration Committee to review KMP packages annually by reference to the group’s performance, executive performance and comparable information from industry sectors. Prior to the establishment of the Nominations and Remuneration Committee in March 2017, the Board conducted this review.

The Remuneration and Nominations Committee sets out to link remuneration polices with the achievement of financial and personal objectives.

Group financial performance

The earnings of the Group for the two years ending 30 June 2017 are summarised as follows:

Financial performance 2017 2016

Sales revenue – external customers 5,375,117 4,713,558

Earnings before interest tax and depreciation and amortisation (EBITDA) (2,883,644) 456,400

Profit after income tax (3,464,036) (218,654)

Basic earnings per share (cents) (3.03) (0.29)

Share price at year end (cents) 0.09 0.165


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REMUNERATION REPORT – AUDITED

Components of remuneration

Non-executive directors are remunerated with fees within the aggregate limit as approved by shareholders.

Name Approved Fee

Russell Yardley $90,000

Steve Bertamini $45,000

Gregory Baxter $45,000

Paul Brandling $45,000

The executive directors and other KMP are remunerated based upon market value of the position and the range of skills and experience they bring to the company and is split between fixed and performance linked remuneration.

Fixed remuneration consists of base remuneration and employer contributions to superannuation funds.

Performance linked remuneration includes short-term incentives and is designed to reward the CEO and KMP’s for meeting and exceeding their financial and personal objectives.

In March 2017 the Board established a Nominations and Remuneration Committee with the responsibility of setting the Key Performance Indicators (KPI’s) for the CEO and have input to the KPI’s for the executives. The KPI’s will generally include measures relating to the Group, the relevant business unit and the individual. At the conclusion of the year the Nominations and Remuneration Committee will assess the performance of the CEO and the CEO will assess the performance of the individual executives against their targets. The CEO’s recommendations will be presented to the Nominations and Remuneration Committee for approval.

The Board has implemented a Director Option Plan. The Option Plan is aimed at incentivising the Directors in retaining key strategic skills. The options have been granted to the Directors vesting over three years with exercising prices of $0.20, $0.24 and $0.288. Refer to the following tables for further details.

In respect of the current financial year, bonus payments were made to key management personnel and are outlined within this report.

Details of Remuneration

Details of remuneration of the Directors and KMP of the Group are set out in the following tables.

2017 Directors’ Remuneration

Short Term Post Employment Share Based

Payments Total

Total Performance

Related Options as a % of

Total

Salary/Fees

$

Bonus

$

Superannuation

$

Options

$

$

%

%

R Yardley 90,000 - - 59,658 149,658 - 39.9

K Glennan 269,975 - 23,425 - 293,400 - -

G Baxter 45,000 - - 29,829 74,829 - 39.9

S Bertamini 45,000 - - 29,829 74,829 - 39.9

P Brandling 41,096 - 3,904 29,829 74,829 - 39.9

Total 491,071 - 27,329 149,145 667,545 - -


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REMUNERATION REPORT – AUDITED 2017 Executive Remuneration


Payments Total

Total Performance

Related4 Deferred shares as a % of Total

Salary/Fees

$

Bonus

$

Superannuation

$

$

$

%

%

D Buerckner1 124,901 13,6995 13,039 71,455 223,094 32.6 32.0

N Conolly2 75,592 - 7,158 306,687 389,437 78.8 78.8

K Hansen3 180,929 - 13,699 77,500 272,128 28.5 28.5

K Negus 152,195 22,8305 16,471 72,571 264,067 27.5 27.5

Total 533,617 36,529 50,367 528,213 1,148,726 - - 1 Appointed 3 October 2016


3 Resigned 21 March 2017

4 Performance related remuneration is continuity of employment

5 Cash bonus paid on outcome of annual performance review

Director and Executive Remuneration

Total 1,024,688 36,529 77,696 677,358 1,816,271

2016 Directors’ Remuneration


Payments Total

Total Performance

Related Options as a % of

Total Salary/Fees Bonus

$

Superannuation

$

Options

$

$

%

%

R Yardley1 52,500 - - 80,310 132,810 - 60.5

K Glennan 269,975 - 23,425 - 293,400 - -

G Baxter1 26,250 - - 40,155 66,405 - 60.5

S Bertamini1 26,250 - - 40,155 66,405 - 60.5

P Brandling1 23,973 - 2,277 40,155 66,405 - 60.5

R Langford2 30,000 - - - 30,000 - -

O Carton2 17,500 - - - 17,500 - -

Total 446,448 - 25,702 200,775 672,925 - - 1 Appointed 16 November 2015



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REMUNERATION REPORT – AUDITED 2016 Executive Remuneration


Payments Total

Total Performance

Related3 Deferred shares as a % of Total

Salary/Fees

$

Bonus

$

Superannuation

$

$

$

%

%

N Conolly1 25,848 - 2,447 29,313 57,608 50.9 50.9

K Hansen2 8,942 - 844 5,686 15,472 36.7 36.7

K Negus2 6,263 - 590 - 6,853 - -

Total 41,053 - 3,881 34,999 79,933 - - 1 Appointed 9 May 2016

2 Appointed 15 June 2016

3 Performance related remuneration is continuity of employment

Director and executive remuneration

Total 487,501 - 29,583 235,774 752,858

Details of Share Based Compensation

Options

There were no options issued in the current financial year.

The terms and conditions of each grant of options affecting remuneration in the current or a future reporting periods are as follows:

KMP Grant date Vesting and

exercise date Expiry date Exercise price Value per option

at grant date % Vested

Steve Bertamini 17 Nov 15 31 Aug 16 31 Aug 19 $0.20 $0.0666 100

Steve Bertamini 17 Nov 15 31 Aug 17 31 Aug 19 $0.24 $0.0539 n/a

Steve Bertamini 17 Nov 15 31 Aug 18 31 Aug 19 $0.288 $0.0423 n/a

Gregory Baxter 17 Nov 15 31 Aug 16 31 Aug 19 $0.20 $0.0666 100

Gregory Baxter 17 Nov 15 31 Aug 17 31 Aug 19 $0.24 $0.0539 n/a

Gregory Baxter 17 Nov 15 31 Aug 18 31 Aug 19 $0.288 $0.0423 n/a

Paul Brandling 17 Nov 15 31 Aug 16 31 Aug 19 $0.20 $0.0666 100

Paul Brandling 17 Nov 15 31 Aug 17 31 Aug 19 $0.24 $0.0539 n/a

Paul Brandling 17 Nov 15 31 Aug 18 31 Aug 19 $0.288 $0.0423 n/a

Russell Yardley 17 Nov 15 31 Aug 16 31 Aug 19 $0.20 $0.0666 100

Russell Yardley 17 Nov 15 31 Aug 17 31 Aug 19 $0.24 $0.0539 n/a

Russell Yardley 17 Nov 15 31 Aug 18 31 Aug 19 $0.288 $0.0423 n/a

The number of options over ordinary shares in the company provided as remuneration to key management personnel is shown below. The options carry no dividends or voting rights. The options will vest if the option holder remains employed by the company at the relevant vesting date.


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REMUNERATION REPORT – AUDITED The table below shows a reconciliation of options held by each KMP from the beginning to the end of FY 2017.

2017

Name and grant date

Balance 1 Jul 2016 Unvested

Granted as compensation Vested Exercised

Lapsed during the

year

Balance at 30 June 2017 Unvested

S Bertamini

17 Nov 15

17 Nov 15

17 Nov 15

500,000

500,000

500,000

-

-

-

500,000

-

-

-

-

-

-

-

-

-

500,000

500,000

G Baxter

17 Nov 15

17 Nov 15

17 Nov 15

500,000

500,000

500,000

-

-

-

500,000

-

-

-

-

-

-

-

-

-

500,000

500,000

P Brandling

17 Nov 15

17 Nov 15

17 Nov 15

500,000

500,000

500,000

-

-

-

500,000

-

-

-

-

-

-

-

-

-

500,000

500,000

R Yardley

17 Nov 15

17 Nov 15

17 Nov 15

1,000,000

1,000,000

1,000,000

-

-

-

1,000,000

-

-

-

-

-

-

-

-

-

1,000,000

1,000,000

Value of options granted as remuneration that have been granted, exercised or lapsed during the year.

2017

Balance

1 July 2016

$

Value Granted

$

Value Exercised

$

Value Lapsed

$

Balance

30 Jun 2017

$

Steve Bertamini 81,424 - - - 81,424

Gregory Baxter 81,424 - - - 81,424

Paul Brandling 81,424 - - - 81,424

Russell Yardley 162,848 - - - 162,848

The fair value of options granted as remuneration and as shown in the above table has been determined in accordance with Australian Accounting Standards, using the Black-Scholes method of calculation and will be recognised as an expense over the relevant vesting period to the extent that conditions necessary for vesting are satisfied.


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REMUNERATION REPORT – AUDITED Deferred Shares

Rights to deferred shares are outlined in the respective employment agreements for each Executive KMP. The shares vest once the performance conditions are met. On vesting each right automatically converts into one ordinary share. The executives do not receive any dividend and are not entitled to vote in relation to the rights during the vesting period. If an executive ceases employment before the rights vest and is not deemed a good leaver the rights will be forfeited.

The fair value of the rights is determined based on the market price of the company’s shares at the grant date.

2017

KMP Deferred Shares Performance conditions

AASB 2 Expense

$ Grant Date

Share price at Grant Date

$ Vesting Date Exercise

Price

N Conolly1 700,000 Continued employment

96,000 9 May 2016 0.16 8 May 2017 Nil


104,011 9 May 2016 0.16 8 May 2018 Nil


106,676 9 May 2016 0.16 8 May 2019 Nil

K Hansen2 500,000 Continued employment

77,500 22 October 2016 0.155 30 November 2016 Nil

D Buerckner 300,000 Continued employment

29,252 24 November 2016 0.14 3 October 2017 Nil





K Negus 240,000 Continued employment

33,600 24 November 2016 0.14 15 June 2017 Nil





1 Nick Conolly resigned 30 November 2016 and was deemed a good leaver as per the terms of his employment contract. On this basis his rights are not forfeited, however as per the requirements of AASB 2

all performance criteria have been met and therefore the cost of his deferred shares have been recognised in the current year profit or loss . The vesting date of the deferred shares has not changed.

2 Kurt Hansen resigned 21 March 2017. 500,000 shares vested prior to resignation with the remainder of deferred shares being forfeited.


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REMUNERATION REPORT – AUDITED 2016

KMP Deferred Shares Performance conditions

AASB 2 Expense

$ Grant Date

Share price at Grant Date

$ Vesting Date Exercise

Price

N Conolly 700,000 Continued employment

16,000 9 May 2016 0.16 8 May 2017 Nil


7,989 9 May 2016 0.16 8 May 2018 Nil


5,324 9 May 2016 0.16 8 May 2019 Nil

K Hansen 250,000 Achievement of sales targets

1,678 16 June 2016 0.17 30 June 2017 Nil

K Hansen 500,000 Achievement of sales targets

1,711 16 June 2016 0.17 30 June 2018 Nil

K Hansen 1,000,000 Achievement of sales targets

2,297 16 June 2016 0.17 30 June 2019 Nil

Rights to deferred shares

The table below shows a reconciliation of deferred shares held by each executive KMP from the beginning to the end of FY 2017.

2017


Balance 1 Jul 16

Granted during year Vested Forfeited

Balance 30 Jun 17 Unvested

Maximum value yet to

vest*

Year

granted No. No. No. % No. % No. $

N Conolly1 2016 2,100,000 - 700,000 33.3 - - 1,400,000 117,243

K Hansen2 2016 1,750,000 - - - 1,750,000 100 - -

K Hansen 2017 - 3,000,000 500,000 16.7 2,500,000 83.3 - -

D Buerckner 2017 - 1,500,000 - - - - 1,500,000 138,545

K Negus 2017 - 1,200,000 240,000 20 - - 960,000 95,429 1 Nick Conolly resigned 30 November 2016 and was deemed a good leaver as per the terms of his employment contract. On this basis his rights are not forfeited, however as per the requirements of AASB 2

all performance criteria have been met and therefore the cost of his deferred shares have been recognised in the current year profit or loss .The vesting date of the deferred shares has not changed.

2 Kurt Hansen resigned 21 March 2017. Prior year rights to deferred shares were forfeited following a renegotiated package where the additional rights were granted. 500,000 rights vested prior to resignation

with the balance of 2,500,000 forfeited on resignation.

* The maximum value of the deferred shares yet to vest has been determined as the amount of the grant date fair value of the rights that is yet to be expensed. The minimum value of the deferred shares yet to

vest is nil as the shares will be forfeited if the vesting conditions are not met.


Page 18

REMUNERATION REPORT – AUDITED 2016


Balance 1 Jul 15

Granted during year Vested Forfeited

Balance 30 Jun 16 Unvested

Maximum value yet to

vest*

Year

granted No. No. No. % No. % No. $

N Conolly 2016 - 2,100,000 - - - - 2,100,000 306,687

K Hansen 2016 - 1,750,000 - - - - 1,750,000 291,814 * The maximum value of the deferred shares yet to vest has been determined as the amount of the grant date fair value of the rights that is yet to be expensed. The minimum value of the deferred shares yet to

vest is nil as the shares will be forfeited if the vesting conditions are not met.

Service Agreements

The contracts for service between the Group and specified executives are formalised in service agreements. The major provisions in the agreements relating to remuneration are set out below:

Keith Glennan, Chief Executive Officer

x Permanent employment contract commencing 1 July 2015

x Fixed remuneration of $270,000 including superannuation and director fees and allowances of $23,400

x Opportunity to receive a bonus up to 100% of base salary based on achievement of KPI’s as set by Chairman or remuneration committee when formed. No payment or accrual for a bonus has been taken up for FY 2017

x Termination by provision of two months’ notice by either the Executive or the Company

David Buerckner, Head of Security Operations

x Permanent employment contract commencing 3 October 2016

x Fixed remuneration of $200,385 including superannuation

x Opportunity to receive an annual bonus up to $20,000 inclusive of superannuation based on outcome of annual review undertaken by CEO. An accrual of $15,000 inclusive of superannuation has been taken up for FY 2017.

x Subject to shareholder approval, the issue of 1,500,000 unvested shares at 24 November 2016. Vesting is subject to a service condition.

x Termination by provision of two months’ notice by either the Executive or the Company

Karen Negus, Head of Sales and Marketing

x Permanent employment contract commencing 15 June 2016 and updated 1 April 2017 when appointed to Head of Sales and Marketing

x Fixed remuneration of $153,000 inclusive of superannuation for the period 1 July 2016 up to 30 March 2017. From 1 April 2017 fixed remuneration of $200,385 inclusive of superannuation.

x Opportunity to receive an annual bonus up to $30,000 inclusive of superannuation based on outcome of annual review undertaken by CEO. An accrual of $25,000 inclusive of superannuation has been taken up for FY 2017.

x Subject to shareholder approval, the issue of 1,200,000 unvested shares at 24 November 2016. Vesting is subject to a service condition.

x Termination by provision of one months’ notice by either the Executive or the Company


Page 19

REMUNERATION REPORT – AUDITED KMP Shareholding 2017

Balance at Beginning of

year

Deferred shares vested

as remuneration during year

Issued on exercise of

options during year

Other changes during year

Balance at end of year

On Market Other

R Yardley 600,000 - - 41,666 - 641,666

K Glennan 31,451,435 - - 260,000 - 31,711,435

G Baxter 1,200,000 - - - - 1,200,000

S Bertamini 1,200,000 - - - - 1,200,000

P Brandling 1,200,000 - - - - 1,200,000

K Hansen 30,000 500,000 - 30,000 (560,000)1 -

D Buerckner - - - - - -

K Negus - 240,000 - - - 240,000

1) shares held at resignation date

KMP Shareholding 2016

Balance at

Beginning of year

Deferred shares vested as

remuneration during year

Issued on exercise of options during

year Other changes

during year Balance at end of

year

R Yardley - - - 600,0001 600,000

K Glennan - - - 31,451,4352 31,451,435

G Baxter - - - 1,200,0001 1,200,000

S Bertamini - - - 1,200,0001 1,200,000

P Brandling - - - 1,200,0001 1,200,000

K Hansen - - - 30,0003 30,000

1) Purchased prior to listing

2) Acquired via share swap in subsidiary

3) Acquired on market


Page 20

REMUNERATION REPORT – AUDITED Transactions with KMP and/or their related party

There were no transactions conducted between the Group and KMP or their related parties, apart from those disclosed above relating to equity compensation, that were conducted other than in accordance with normal employee, customer or supplier relationships on terms no more favourable than those reasonably expected under arm’s length dealings with unrelated persons.

End Remuneration Report

This directors’ report, incorporating the remuneration report, is signed in accordance with a resolution of the Board of Directors:

Keith Glennan, Director

28 September 2017

Collins Square, Tower Four Level 18, 727 Collins Street Melbourne VIC 3008 GPO Box 5099 Melbourne VIC 3001 Australia

Tel: +61 3 9603 1700 Fax: +61 3 9602 3870 www.bdo.com.au

BDO East Coast Partnership ABN 83 236 985 726 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO East Coast Partnership and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees.

DECLARATION OF INDEPENDENCE BY DAVID GARVEY TO THE DIRECTORS OF TESSERENT LIMITED

As lead auditor of Tesserent Limited for the year ended 30 June 2017, I declare that, to the best of my

knowledge and belief, there have been:

1. No contraventions of the auditor independence requirements of the Corporations Act 2001 in

relation to the audit; and

2. No contraventions of any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Tesserent Limited and the entities it controlled during the period.

David Garvey

Partner

BDO East Coast Partnership

Melbourne, 28 September 2017

Page 21


Page 22

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 2017 Consolidated Restated*

Note 2017 $

2016 $

Revenue from continuing operations 2.2 5,404,504 4,753,854

Other income 2.2 1,476,938 660,969

Software licence and connectivity fees (2,347,575) (1,947,656)

Employee benefits expense (4,127,401) (1,634,062)

Depreciation and amortisation expense (617,303) (289,532)

Finance costs (8,152) (91,993)

Initial public offering costs - (442,945)

Occupancy costs (688,074) (198,845)

Communication costs (507,645) (256,551)

Consulting and legal costs (734,695) (552,981)

Travel (170,231) -

Bad and doubtful debts (40,916) (33,833)

Other expenses (1,148,549) (478,608)

Loss before income tax 2.3 (3,509,099) (512,183)

Income tax benefit 2.6 45,063 293,529

Net loss for the year (3,464,036) (218,654)

Other comprehensive income - -

Total comprehensive income for the year (3,464,036) (218,654)

Earnings per share

Basic earnings per share (cents) 2.4 (2.99) (0.29)

Diluted earnings per share (cents) 2.4 (2.99) (0.29)

The above Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes

*Comparative period was restated for finalisation of provisional accounting. Refer note 2.5


Page 23

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2017

Consolidated Restated*

Note 2017 $

2016 $

ASSETS

CURRENT ASSETS

Cash and cash equivalents 4.3 2,860,648 3,380,740

Trade and other receivables 3.1 799,568 331,246

Prepayments 160,698 89,067

Inventories 25,981 147,576

Current tax asset 2.6 765,430 282,274

Other assets 834 71,511

TOTAL CURRENT ASSETS 4,613,159 4,302,414

NON-CURRENT ASSETS

Trade and other receivables 3.1 - 1,064

Plant and equipment 3.5 694,727 561,100

Intangible assets 3.6 867,572 4,485,762

Deferred tax asset 2.6 514,462 667,288

Other non-current assets 298,598 76,655

TOTAL NON-CURRENT ASSETS 2,375,359 5,791,869

TOTAL ASSETS 6,988,518 10,094,283

LIABILITIES

CURRENT LIABILITIES

Trade and other payables 3.2 1,277,767 1,250,371

Unearned income 709,463 815,905

Provisions 3.3 646,464 1,078,567

TOTAL CURRENT LIABILITIES 2,633,694 3,144,843

NON-CURRENT LIABILITIES

Provisions 3.3 206,541 29,691

TOTAL NON-CURRENT LIABILITIES 206,541 29,691

TOTAL LIABILITIES 2,840,235 3,174,534

NET ASSETS 4,148,283 6,919,749


Page 24

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2017

EQUITY

Issued capital 4.4 10,140,892 9,917,792

Reserves 5.2 705,347 235,877

Accumulated losses (6,697,956) (3,233,920)

TOTAL EQUITY 4,148,283 6,919,749

The above Statement of Financial Position should be read in conjunction with the accompanying notes.

*Comparative period was restated for finalisation of provisional accounting. Refer note 2.5


Page 25

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2017

Consolidated Issued

capital

Reserves Accumulated

losses

Total equity

$ $ $ $

Balance at 1 July 2015 1,609,260 - (3,015,266) (1,406,006)

Comprehensive income

Loss for the year (restated) - - (218,654) (218,654)

Other comprehensive income for the year - - - -

Total comprehensive income for the year

-

-

(218,654)

(218,654)

Transactions with owners, in their capacity as owners, and other transfers

Shares issued during the year 9,301,224 - - 9,301,224

Capital raising costs (992,692) - - (992,692)

Shares and options granted during the year

-

235,877

-

235,877

Total transactions with owners and other transfers

8,308,532

235,877

-

8,544,409

Balance at 30 June 2016 (restated) 9,917,792 235,877 (3,233,920) 6,919,749

Balance at 1 July 2016 (restated) 9,917,792 235,877 (3,233,920) 6,919,749

Comprehensive income

Loss for the year - - (3,464,036) (3,464,036)

Other comprehensive income for the year - - - -

Total comprehensive income for the year

-

-

(3,464,036)

(3,464,036)

Transactions with owners, in their capacity as owners, and other transfers

Shares issued during the year 223,100 (223,100) - -

Shares and options granted during the year

-

692,570

-

692,570

Total transactions with owners and other transfers

223,100

469,470

-

692,570

Balance at 30 June 2017 10,140,892 705,347 (6,797,956) 4,148,283

The above Statement of Changes in Equity should be read in conjunction with the accompanying notes.


Page 26

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2017

Consolidated Restated

Note 2017 $

2016 $

Cash flows from operations

Receipts from customers 6,385,337 4,796,725

Payments to suppliers and employees (9,144,143) (4,999,596)

(2,758,806) (202,871)

Income tax paid (17,905) (25,673)

Interest received 31,983 38,357

Interest paid (8,152) (91,993)

Net cash outflow from operating activities 5.5 (2,752,880) (282,180)

Cash flows from investing activities

Purchase of plant and equipment (728,897) (271,710)

Purchase of intangibles (260,040) -

Acquisition of business, net of cash paid out 2.5 (500,000) (450,111)

Payout on sale of customer contracts 3.6 (164,401) -

Proceeds from sale of available-for-sale financial assets 429,000 -

Proceeds from sale of plant and equipment 457,126 -

Proceeds from sale of intellectual property 3.6 3,000,000 -

Net cash inflow/(outflow) from investing activities 2,232,788 (721,821)

Cash flows from financing activities

(Repayment of)/proceeds from borrowings - (700,000)

Proceeds from issuing of shares - 6,739,145

Payments for initial public offering - (1,760,687)

Repayment of loans from related parties - (410,312)

Net cash inflow from financing activities - 3,868,146

Net increase in cash and cash equivalents (520,092) 2,864,145

Cash and cash equivalents at the beginning of the financial year

3,380,740

516,595

Cash and cash equivalents at the end of the financial year 4.3

2,860,648

3,380,740

The above Statement of Cash Flows should be read in conjunction with the accompanying notes


Page 27

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

1. Introduction to the Report Statement of Compliance These general purpose financial statements of Tesserent Limited and its controlled entities have been prepared in accordance with the Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. The consolidated financial statements comply with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

The financial statements were authorised for issue by the Board of Directors on 28 September 2017. Basis of Preparation Except for cash flow information, the financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities.

Critical accounting estimates and assumptions The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies.

Accounting estimates and judgments Note Page

Impairment of goodwill 3.6 43

Taxation 2.6 36

Significant accounting policies

The significant accounting policies adopted in the preparation of the financial statements are set out below. Other significant policies are contained in the notes to the financial statements to which they relate. The financial statements are for the Group consisting of Tesserent Limited (company) and its controlled entities.

i. Principles of Consolidation The consolidated financial statements incorporate all of the assets, liabilities and results of the parent Tesserent Limited and all of the subsidiaries. Subsidiaries are entities the parent controls. A list of the subsidiaries is provided in Note 5.1. The assets, liabilities and results of all subsidiaries are fully consolidated into the financial statements of the Group from the date on which control is obtained by the Group. Intercompany transactions, balances and unrealised gains or losses on transactions between group entities are fully eliminated on consolidation. Accounting policies of subsidiaries have been changed and adjustments made where necessary to ensure uniformity of the accounting policies adopted by the Group.

ii. Foreign currency translation Functional and presentation currency The consolidated financial statements are presented in Australian dollars (AUD), which is also the functional currency of the Company. Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency of the respective Group entity, using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange


Page 28

gains and losses resulting from the settlement of such transactions and from re-measurement of monetary items at year end exchange rates are recognised in profit or loss. Foreign operations In the Group’s financial statements, all assets, liabilities and transactions of Group entities with a functional currency other than the AUD are translated into AUD upon consolidation. The functional currency of the entities in the Group has remained unchanged during the reporting period. On consolidation, assets and liabilities have been translated into AUD at the closing rate at the reporting date. Income and expenses have been translated into AUD at the average rate over the reporting period. Exchange differences are changed or credited to other comprehensive income and recognised in the currency translation reserve in equity.

iii. New Accounting Standards and Interpretations not yet adopted by the Group Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the company for the reporting period ended 30 June 2017. Accounting Standards issued by the AASB that are not yet mandatorily applicable to the Group, together with an assessment of the potential impact of such pronouncements on the Group when adopted in future periods, are discussed below:

a. AASB 9: Financial Instruments and associated Amending Standards (applicable to annual reporting periods beginning on or after 1 January 2018). The Standard will be applicable retrospectively and includes revised requirements for the classification and measurement of financial instruments, revised recognition and de-recognition requirements for financial instruments and simplified requirements for hedge accounting. The directors do not anticipate that the adoption of AASB 9 will have a material impact on the Group’s financial instruments.

b. AASB 15: Revenue from Contracts with Customers (applicable to annual reporting periods beginning on or after 1 January 2018, as deferred by AASB 2015-8: Amendments to Australian Accounting Standards – Effective Date of AASB 15). When effective, this Standard will replace the current accounting requirements applicable to revenue with a single, principles-based model. Except for a limited number of exceptions, including leases, the new revenue model in AASB 15 will apply to all contracts with customers as well as non-monetary exchanges between entities in the same line of business to facilitate sales to customers and potential customers. The core principle of the Standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. To achieve this objective, AASB 15 provides the following five-step process:

i. Identify the contract(s) with a customer

ii. Identify the performance obligations in the contract(s)

iii. Determine the transaction price

iv. Allocate the transaction price to the performance obligations in the contract(s); and

v. Recognise revenue when (or as) the performance obligations are satisfied.

The directors are still assessing the impact AASB 15 will have on the Group’s income recognition under contracts for services.

c. AASB 16: Leases (applicable to annual reporting periods beginning on or after 1 January 2019). When effective, this Standard will replace the current accounting requirements applicable to leases


Page 29

in AASB 117: Leases and related Interpretations. AASB 16 introduces a single lessee accounting model that eliminates the requirement for leases to be classified as operating or finance leases. The main changes introduced by the new Standard include:

i. Recognition of a right to use asset and liability for leases (excluding short term leases with less than 12 months tenure and lease relating to low value assets)

ii. Depreciation of right to use assets in line with AASB 116 Property , Plant and Equipment in profit or loss and unwinding of the liability in principal and interest components

iii. Variable lease payments that depend on an index or a rate are included in the initial measurement of the lease liability using the index or rate at the commencement date; and

iv. Additional disclosure requirements.

The transitional provisions of AASB 16 allow a lessee to either retrospectively apply the Standard to comparatives in line with AASB 108 or recognise the cumulative effect of retrospective application as an adjustment to opening equity on the date of initial application.

To the extent that the Group, as a lessee, has significant operating leases outstanding at the date of initial application, 1 July 2019, right-to-use assets will be recognised for the amount of the unamortised portion of the useful life, and lease liabilities will be recognised at the present value of the outstanding lease payments.

Thereafter, earnings before interest, depreciation, amortisation and tax (EBITDA) will increase because operating lease expenses currently included in EBITDA will be recognised instead as amortisation of the right-to-use asset, and interest expense on the lease liability. However, there will be an overall reduction in net profit before tax in the early years of a lease because the amortisation and interest charges will exceed the current straight-line expense incurred under AASB 117 Leases. This trend will reverse in later years.

2. Business Result for the Year This section provides the information that is most relevant to understanding the financial performance of the Group during the financial year and, where relevant, the accounting policies applied and the critical judgements and estimates made.

2.1 Segment information Identification of reportable segments An operating segment is a component of an entity that engages in business activities from which it may earn revenue and incur expenses, whose operating results are regularly reviewed by the Group’s Chief Operating Decision Maker (CODM) in order to effectively allocate Group resources and assess performance. The Group has identified its operating segments based on the internal reports that are reviewed and used by the Chief Executive Officer CEO in the capacity of CODM. Two operating segments have been identified: IT Security Managed Services and Software Licensing. The CEO reviews Profit before tax. The accounting policies adopted for internal reporting to the CEO are consistent with those adopted in the financial statements.


Page 30

IT Security Managed Services

Software Licensing

Inter Segment Eliminations

Totals

2017 $ $ $ $ Revenues Sales to external customers 5,043,856 331,261 - 5,375,117 Inter segment sales 7,530 359,763 (367,293) - Total sales revenue 5,051,386 691,024 (367,293) 5,375,117 Gain on sale of intellectual property 571,794 - - 571,794 Gain on sale of customer contracts 569,694 - - 569,694 Other revenue 364,837 - - 364,837 Total revenue 6,557,711 691,024 (367,293) 6,881,442 Profit/(loss) before income tax expense (3,963,429) 454,330 - (3,509,099) Total segment assets 5,802,316 1,186,202 - 6,988,518 Total segment liabilities 2,395,982 444,253 - 2,840,235 IT Security

Managed Services

Software Licensing

Inter Segment Eliminations

Totals

2016 $ $ $ $ Revenues Sales to external customers 4,360,642 352,916 - 4,713,558 Inter segment sales 28,304 386,010 (414,314) - Total sales revenue 4,388,946 738,926 (414,314) 4,713,558 Other income – gain on sale of software 530,946 - - 530,946 Other revenue 170,319 - - 170,319 Total revenue 5,090,211 738,926 (414,314) 5,414,823 Profit/(loss) before income tax expense (906,009) 393,826 - (512,183) Total segment assets 8,964,610 1,129,673 - 10,094,283 Total segment liabilities 2,438,689 735,845 - 3,174,534 Intersegment transactions An internally determined transfer price is set for all intersegment sales. This price is reset quarterly and is based on what would be realised in the event the sale was made to an external party at arm’s length. All such transactions are eliminated on consolidation of the Group’s financial statements. Corporate charges are allocated to reporting segments based on the segments’ overall proportion of revenue generation within the Group. The Board of Directors believes this is representative of likely consumption of head office expenditure that should be used in assessing segment performance and cost recoveries. Intersegment loans payable and receivable are initially recognised at the consideration received/to be received net of transaction costs. If intersegment loans receivable and payable are not on commercial terms, these are not adjusted to fair value based on market interest rates. This policy represents a departure from that applied to the statutory financial statements.


Page 31

Consolidated 2017

$ 2016

$ Revenue from external customers attributable to: Australia 4,943,686 4,301,700 International 431,431 411,858 Total 5,375,117 4,713,558 2.2 Revenue Recognition and measurement The Group recognises revenue when it is probable that the economic benefit will flow to the entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Sale of Goods Sale of goods revenue is recognised at the point of sale, which is where the customer has taken delivery of the goods, the risks and rewards are transferred to the customer and there is a valid sales contract. Amounts disclosed as revenue are net of sales returns and trade discounts. Rendering of services Revenue derived through licensing arrangements for customers who subscribe to Tesserent’s security infrastructure platform (for the provision of Security-as-a-Service) is recognised as the services are provided over the licensing period. The company has determined that these services are provided evenly over the term of the contract. Revenue derived from the rental of hardware by customers is recognised consistently over the licensing period, in line with service delivery. Revenue derived from the connectivity and related support services (including installation and setup of hardware) is recognised at the time the service is provided. On the basis that monthly unused support services do not accumulate, the company recognises revenue evenly over the term of the contract, in line with service delivery. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Consolidated 2017 2016 $ $ Revenue from continuing operations Sales revenue 5,375,117 4,713,558 Other revenue 29,387 40,296 5,404,504 4,753,854 Other income Gain on sale of software IP (note 3.6) 571,794 - Gain on sale of customer contracts (note 3.6) 569,694 - Research and development tax concession 163,837 94,091 Bargain purchase gain (note 2.5) - 530,946 Other 171,613 35,932 1,476,938 660,969


Page 32

2.3 Loss for the year

Loss before income tax from continuing operations includes the following specific expenses

Consolidated

2017 2016

Employee benefits expense

- Defined contribution superannuation expense 298,111 140,899

- Research and development costs 1,050,348 622,481

Bad and doubtful debts expense

- Trade receivables 19,980 33,833

Occupancy costs

- Minimum lease payments 418,567 161,006

Consulting and legal costs

- Business combination acquisition related costs - 42,503

2.4 Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Tesserent Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year.

Consolidated 2017

Cents 2016

Cents From continuing operations attributable to the ordinary equity holders of the company (2.99)

(0.29)

Total basic earnings per share attributable to the ordinary equity holders of the company (2.99)

(0.29)

Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Consolidated 2017

Cents 2016

Cents From continuing operations attributable to the ordinary equity holders of the company1 (2.99)

(0.29)

Total diluted earnings per share attributable to the ordinary equity holders of the company1 (2.99)

(0.29)

1There are 9,000,000 options and 3,850,000 unvested deferred shares that have not been taken into account in determining diluted EPS because their effect is anti-dilutive.


Page 33

Reconciliation of earnings used in calculating earnings per share Consolidated 2017

$ 2016

$ Basic earnings per share Loss attributable to the ordinary equity holders of the company used in calculating basic earnings per share:

From continuing operations (3,464,036) (218,654) Diluted earnings per share Loss attributable to the ordinary equity holders of the company used in calculating basic earnings per share:

From continuing operations (3,464,036) (218,654) Weighted average number of shares used as the denominator Consolidated 2017

Number 2016

Number Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 115,738,337

74,310,516

Weighted average number of ordinary shares used as the denominator in calculating diluted earnings per share 115,738,337

74,310,516

2.5 Business combinations Business combinations occur where an acquirer obtains control over one or more businesses.

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. The business combination will be accounted for from the date that control is obtained, whereby the fair value of the identifiable assets acquired and liabilities (including contingent liabilities) assumed is recognised (subject to certain limited exemptions).

When measuring the consideration transferred in the business combination, any asset or liability resulting from a contingent consideration arrangement is also included. Subsequent to initial recognition, contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability is remeasured in each reporting period to fair value, recognising any change to fair value in profit or loss, unless the change in value can be identified as existing at acquisition date.

All transaction costs incurred in relation to business combinations, other than those associated with the issue of a financial instrument, are recognised as expenses in profit or loss when incurred.

The acquisition of a business may result in the recognition of goodwill or a gain from a bargain purchase.

Goodwill Goodwill recognised as part of a business combination transaction is recognised in accordance with the accounting policy note in section 3.6. 2017 There were no business combination transactions impacting Tesserent Limited for the year ended 30 June 2017. Blue Reef Pty Ltd - Summary of acquisition – finalisation of provisional accounting On 9 May 2016 Tesserent Australia Pty Ltd, a subsidiary of Tesserent Limited, acquired the business of Blue Reef Pty Ltd including all tangible and intangible assets and liabilities.

For 30 June 2016, this business combination had initially been accounted for on a provisional basis in accordance with AASB 3 Business Combinations. Therefore the fair value of assets acquired, liabilities and contingent liabilities assumed were initially estimated by the consolidated entity taking into consideration all available information at the reporting date. At 30 June 2016 the Group recorded goodwill as the only intangible asset. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and therefore may have an impact on the assets and liabilities, depreciation and amortisation reported.

The consolidated entity has finalised the accounting for this business combination and in doing so recognised Software


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and Customer Contracts as intangible assets. As noted above the finalisation accounting is retrospective and therefore the adjustment impacts the 30 June 2016 financial year.

Determination of fair value of intangible assets on acquisition

Software

As announced on 16 December 2016, the Group completed the sale of the original Blue Reef Pty Ltd Software IP acquired as part of the business combination to Family Zone Cyber Safety Limited (ASX:FZO). This transaction was for the sale of the Blue Reef software intellectual property on a separate and stand-alone basis and therefore enabled a fair value to be determined for the Blue Reef Software IP acquired in the original transaction.

Therefore using the FZO software intellectual property sale transaction consideration after allowing for minor timing and software development cost adjustments, the Group was in a position to determine the fair value of the Software Intellectual Property as at the original transaction date as being $3.43m.

Customer contracts

The fair value of the customer contracts was determined in consultation with an industry expert by reference to the net present value of the incremental financial benefit estimated to be received by the Group as a result of receiving the benefit of these contracts.

Based upon contracted sales and average net profit margins over remaining contract period, forecast profit ranges were determined. Using a weighted average cost of capital of 15.08% the forecast cash flows were discounted to their net present value. The Group adopted $210,000 for the fair value of customer contracts acquired.

Set out below is the impact to finalisation of the provisional accounting based on the 30 June 2016 financial statements.

Adjustment to the 30 June 2016 consolidated statement of profit or loss and comprehensive income: (Loss) before

income tax Tax expense /

(credit) Net (loss) for the

year

$ $ $

Provisional accounting basis (1,024,507) (270,641) (753,866)

Adjustments to finalise provisional accounting x Bargain purchase gain 530,946 - 530,946 x Capitalised development costs 72,357 - 72,357 x Amortisation – software (86,567) (21,565) (65,002) x Amortisation – customer contracts (4,412) (1,323) (3,089)

Post provisional accounting adjustments (512,183) (293,529) (218,654) Details of the original purchase consideration terms, fair value of the net assets acquired as recorded on the provisional basis and the final position as impacting the fair value of net assets acquired, and intangible assets are as follows: 2016

Purchase consideration: $

Cash paid 500,000

Shares issued1 1,828,250

Deferred consideration – cash2 500,000

Total purchase consideration 2,828,250

1 12,875,000 shares are provided as part consideration for the transaction. Of these shares, 9,656,250 were placed in voluntary escrow for a period of 24 months effective from the transaction date. The value applicable to the equity consideration was based on the share price at transaction date with a marketability discount of 15% applied to the value of the escrowed shares. 2 The company paid the balance of the deferred consideration in two instalments of $250,000 on 9th November 2016 and 19th December 2016.


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The assets and liabilities recognised within the consolidated statement of financial position as at 30 June 2016 as a result of the acquisition are as follows: Final

Fair Value

Provisional Basis

Fair Value Variance

$ $ $

Plant and equipment 225,730 225,730 -

Software IP 3,434,406 - 3,434,406

Customer contracts 210,000 - 210,000

Employee provisions (154,260) (154,260) -

Trade creditors (27,270) (27,270) -

Provision for onerous contracts (223,032) (223,032) -

Deferred tax asset 113,188 113,188 -

Deferred tax liability (219,567) - (219,567)

Net identifiable liabilities acquired 3,359,196 (65,644) 3,424,838

(Less)/Add: (bargain purchase) / goodwill

(530,946) 2,893,894 3,424,838

Purchase consideration 2,828,250 2,828,250 -

The bargain purchase gain is attributable to the underlying business capability and operational performance. It will not be assessable for tax purposes.


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2.6 Taxation The income tax income for the year comprises current tax income and deferred tax income. Current tax

Current tax assets are measured at the amounts expected to be paid to be recovered from the relevant taxation authority.

Deferred tax

Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well as unused tax losses.

Except for business combinations, no deferred income tax is recognised from the initial recognition of an asset or liability, where there is no effect on accounting or taxable profit or loss.

Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. With respect to non-depreciable items of property, plant and equipment measured at fair value and items of investment property measured at fair value, the related deferred tax liability or deferred tax asset is measured on the basis that the carrying amount of the asset will be recovered entirely through sale.

Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Offsetting balances

Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where: (i) a legally enforceable right of set-off exists; and (ii) the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled.

Tesserent Limited and its Australian subsidiaries have applied the tax consolidation legislation, which means that these entities are taxed as a single entity. As a consequence, the deferred tax assets and deferred tax liabilities of these entities have been offset in the consolidated financial statements.

i. Reconciliation of income tax expense to prima facie tax payable

Consolidated

2017 2016

$ $

Loss from continuing operations before income tax expense (3,509,099) (512,183)

Prima facie tax rate of 27.5% (2016:30%) 965,002 153,654

Tax effect of amounts which are not deductible/(taxable) in calculating taxable income:

Share based payments not deductible (46,762) (70,763)

Amortisation customer contracts not deductible (8,966) -

Amortisation of intellectual property not deductible (96,312) -

Current year tax losses not recognised (773,418) -

Restate temporary differences 69,497 -

Other non-deductible / assessable (124,744) 14,184


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Bargain purchase gain non assessable - 159,284

Prior year adjustments 17,439 7,503

Tax offset for R&D claim 43,327 29,667

Income tax credit 45,063 293,529

Income tax comprises of:

Current tax 615,865 188,183

Deferred tax 115,680 100,605

Adjustments to current tax for:

unrecognised temporary differences in prior periods 17,439 4,741

Restatement of deferred tax balances to current tax rate 69,497 -

Current year tax losses not recognised (773,418) -

Income tax credit 45,063 293,529

ii. Amounts recognised directly in equity

Deferred tax: transaction costs on initial public offering - 425,439

iii. Deferred tax balances

Deferred tax comprises of temporary differences attributable to:

Tax losses 85,776 122,644

Share issue costs 233,991 340,351

Provisions 224,908 336,439

Intangible assets - (196,680)

Other 43,362 75,146

Set-off of deferred tax liabilities pursuant to set-off provisions (73,575) (10,612)

514,462 667,288

Movement in balances

Tax losses

Share issue costs

Provisions Other Total

As at 1 July 2015 - - 39,308 13,659 52,967

Charged

- to profit or loss 122,644 (85,088) (10,714) 50,875 77,717

- directly to equity - 425,439 - - 425,439

Business acquisition 307,845 (196,680) 111,165

As at 30 June 2016 122,644 340,351 336,439 (132,146) 667,288

Charged to

- to profit or loss (36,868) (106,360) (111,531) 101,933 (152,826)

As at 30 June 2017 85,776 233,991 224,908 (30,213) 514,462


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Carried forward tax losses of $2,812,411 have not brought to account as a deferred tax asset of $773,418. Based on the value of tax losses incurred, the directors’ have formed an opinion that the business was not in a position to satisfy the criteria for recognising these losses as a deferred tax asset. These losses remain available for the Group to use in the future.

Under normal circumstances, the benefits of deferred tax losses not brought to account can only be realised in the future if:

x assessable income is derived of a nature, and of an amount sufficient to enable the benefit from the deductions to be realised

x conditions for deductibility imposed by law are complied with; and

x no changes in tax legislation adversely affect the realisation of the benefit from the deductions.

The directors on a regular basis will assess the recognition of the deferred tax assets.

iv. Franking credits

Consolidated

2017 2016

$ $

Franked dividends - -

Franking credits available for subsequent financial years based on a tax rate of 30% 25,673 25,673

25,673 25,673

v. Research and development

Consolidated

2017 2016

$ $

Current tax asset 765,430 282,274

The Group undertakes eligible research and development (R&D) activities and is therefore entitled to claim an R&D offset under the R&D tax incentive as administered by The Australian Taxation Office and the Department of Industry, Innovation and Science. The current tax receivable for FY2016 was received July 2017 and is therefore included in FY2017, along with the FY2017 offset.

Key estimate and judgment: Taxation

The Group is subject to income taxes in Australia. Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provisions in the period in which such determination is made.

Diversity in practice exists around the accounting treatment of refundable R&D incentives, because the Australian Accounting Standards do not specifically address R & D incentives. The Group has decided to record R&D refundable tax incentives as an offset against income tax expense, up to the company’s prevailing tax rate, and the remaining R&D incentive has been recorded in other income.


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3. Operating Assets and Liabilities 3.1 Trade and other receivables

Recognition and measurement

Trade and other receivables include amounts due from customers for goods sold and services performed in the ordinary course of business. Receivables expected to be collected within 12 months of the end of the reporting period are classified as current assets. All other receivables are classified as non-current assets.

Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. The amount of the impairment loss is recognised in profit or loss within impairment losses on loans and receivables. When a trade receivable for which an impairment allowance had been recognised becomes uncollectable in as subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the impairment losses on loans and receivables in profit or loss.

Consolidated

2017 $

2016 $

CURRENT

Trade receivables 382,734 341,670

Provision for impairment (33,000) (13,020)

349,734 328,650

Other receivables 449,834 2,596

449,834 2,596

Total current trade and other receivables 799,568 331,246

NON-CURRENT

Amounts receivable from related parties - 1,064

Total non-current trade and other receivables - 1,064

Unimpaired past due loans and receivables

Past due under 30 days 68,516 51,982

Past due 30 days to under 60 days 165,708 83,641

Past due 60 days to under 90 days 18,746 52,095

Past due 90 days and over 77,038 80,415

Total unimpaired past due loans and receivables 330,008 268,133

Total unimpaired loans and receivables 799,568 332,310

Unimpaired past due as a percentage of total unimpaired loans and receivables

41% 81%

Unimpaired past due 30 days and over as a percentage of total unimpaired loans and receivables

33% 65%


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Reconciliation of provision for impairment

Opening provision 13,020 -

Additional provision 19,980 46,853

Receivables written off as uncollectible - (33,833)

Closing provision 33,000 13,020

3.2 Trade and other payables


These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. The carrying amounts of trade and other payables are assumed to be the same as their fair values due to their short term nature.

Consolidated

2017 $

2016 $

CURRENT

Trade payables 720,392 549,825

Sundry payables and accrued expenses 557,375 200,546

Deferred consideration - 500,000

1,277,767 1,250,371

3.3 Provisions

Recognition and measurements

Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. Provisions are measured using the best estimate of the amounts required to settle the obligation at the end of the reporting period.

Employee Benefits

The current portion of this liability includes all of the accrued annual leave and the unconditional entitlements to long service leave where employees have completed the required period of service.

Long service leave

The liability for long service leave is measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted to their net present value at the end of the reporting period using corporate bond rates.

Retirement benefit obligations

The Group makes payments to employees’ superannuation funds in line with the relevant superannuation legislation. Contributions made are recognised as expenses when they arise.

Bonus schemes

The Group recognises a liability and an expense for bonuses on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

Onerous contracts

The Group has previously recognised a provision for contractual services to be provided to the Group which were


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taken up as part of business combination transactions in the prior year. The Group is contractually obliged to make payment for these services within 12 months of the end of the current financial year.

Consolidated

2017 $

2016 $

CURRENT

Employee benefits 231,904 279,375

Onerous contracts 414,560 799,192

646,464 1,078,567

NON-CURRENT

Employee benefits 34,352 29,691

Onerous contracts 1,005 -

Make good - premises 75,000 -

Lease incentive 96,183 -

206,540 29,691

Movement in provisions

Employee benefits

Onerous contracts

Make good premises

Lease incentive

Opening balance 309,066 799,192 - -

Recognised in profit or loss during period 62,115 (383,627) 75,000 96,183

Provision reduced through business disposal (104,925) - - -

Closing balance 266,256 415,565 75,000 96,183

3.4 Contingent liabilities

As at the reporting date, there were no material claims or disputes of a contingent nature against the Company and its subsidiaries.

3.5 Plant and equipment


Plant and equipment are measured on the cost basis and therefore carried at cost less accumulated depreciation and any accumulated impairment. In the event the carrying amount of plant and equipment is greater than the estimated recoverable amount, the carrying amount is written down immediately to the estimated recoverable amount and impairment losses are recognised either in profit or loss. A formal assessment of recoverable amount is made when impairment indicators are present.

The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised as expenses in profit or loss during the financial period in which they are incurred.

Depreciation

The depreciable amount of all fixed assets is depreciated on a straight-line basis over the asset’s useful life to the consolidated group commencing from the time the asset is held ready for use. Leasehold improvements are


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depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements.

The depreciation rates used for each class of depreciable assets are:

Class of Fixed Asset Depreciation Rate

Furniture & Fixtures 10% to 100%

Leasehold improvements 14.3%

Hardware employed 66.67%

Plant & equipment 7.5% to 66.67%

Equipment leased to external parties 40%

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Consolidated

Furniture & Fixtures

Hardware employed

Leasehold improvement

Equipment for lease

Plant & Equipment

Total

2017

Opening net book value 40,497 256,129 124,510 - 139,964 561,100

Additions 134,295 153,501 487,966 - 58,910 834,672

Disposals (77,618) (246,013) (122,808) - (20,135) (466,574)

Depreciation charge (11,338) (143,247) (13,782) - (66,104) (234,471)

Net book amount 85,836 20,370 475,886 - 112,635 694,727

2017

Cost 112,062 345,952 487,966 16,177 381,272 1,343,429

Accumulated depreciation (26,226) (325,582) (12,080) (16,177) (268,637) (648,702)

Net book amount 85,836 20,370 475,886 - 112,635 694,727

Consolidated

Furniture & Fixtures

Hardware employed

Leasehold improvement

Equipment for lease

Plant & Equipment

Total

2016

Opening net book value 19,221 89,650 127,889 - 116,411 353,171

Acquired as part of business combinations

- 202,355 - - 23,375 225,730

Additions 25,140 82,131 - - 73,474 180,745

Depreciation charge (3,864) (118,007) (3,379) - (73,296) (198,546)

Net book amount 40,497 256,129 124,510 - 139,964 561,100

2016

Cost 57,584 561,354 135,157 16,177 353,918 1,124,190

Accumulated depreciation (17,087) (305,225) (10,647) (16,177) (213,954) (563,090)

Net book amount 40,497 256,129 124,510 - 139,964 561,100


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3.6 Intangibles


Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the de-recognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill on acquisition of subsidiaries or businesses is included in intangible assets.

Goodwill is carried at cost less any accumulated impairment losses. Goodwill is calculated as the excess of the sum of:

i) the consideration transferred;

ii) any non-controlling interest (determined under either the full goodwill or proportionate interest method); and

iii) the acquisition date fair value of any previously held equity interest;

over the acquisition date fair value of net identifiable assets acquired.

Goodwill and intangible assets with an indefinite useful life are tested for impairment annually and are allocated to the Group's cash-generating units or groups of cash-generating units, representing the lowest level at which goodwill is monitored and not larger than an operating segment. Gains and losses on the disposal of an entity include the carrying amount of goodwill related to the entity disposed of.

Impairment of assets An impairment loss is recognised for the amount by which the asset’s carrying value exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows of other assets or groups of assets (CGUs). There is no impairment recognised in 2017 (2016: nil).

Reconciliation

Reconciliations of the written down values at the beginning and end of the current financial period are set out below:

Consolidated Goodwill Intellectual property

Software IP Customer contracts

Total

2016 $ $ $ $ $

Balance 30 June 2016 (provisional accounting)

3,671,269 82,601 - - 3,753,870

Provisional accounting adjustments (2,893,894) - 3,434,406 210,000 750,512

Post provisional accounting adjustments

- Additions - - 72,357 - 72,357

- Accumulated amortisation - - (86,566) (4,411) (90,977)

Balance 30 June 2016 777,375 82,601 3,420,197 205,589 4,485,762

2016

Cost 777,375 82,601 3,506,763 210,000 4,576,739

Accumulated amortisation - - (86,566) (4,411) (90,977)

Net book amount 777,375 82,601 3,420,197 205,589 4,485,762


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Consolidated Goodwill Intellectual property

Software IP Customer contracts

Total

2017

Opening net book value 777,375 82,601 3,420,197 205,589 4,485,762

Additions - 7,596 252,444 - 260,040

Accumulated amortisation - (353,111) (29,603) (382,714)

Disposal - - (3,319,530) (175,986) (3,495,516)

Balance 30 June 2017 777,375 90,197 - - 867,572

2017

Cost 777,375 90,197 - - 867,572

Accumulated amortisation - - - - -

Net book amount 777,375 90,197 - - 867,572

Sale of software IP

On 16 December 2016 Tesserent completed the sale of the Sonar/MyNet intellectual property to Family Zone Cyber Safety Limited (ASX:FZO) (‘FZO’) for $3.5m cash and 1.0m shares in FZO. The intellectual property had originally been acquired as part of the Blue Reef business acquisition. The settlement terms of this transaction was subsequently amended in June 2017 whereby the cash value was changed from $3.5m to $3.25m and Tesserent were issued 1.0m shares in FZO.

Transaction summary is as follows:

2017

$

Cash consideration Received as at 30 June 2017 Deferred consideration (net of GST)

- 6 monthly instalments from July 2017 FZO Shares at fair value Total Consideration Employee liabilities transferred Plant & equipment sold at wdv Reversal of DTA/DTL

Value of software IP (wdv)

3,000,000

250,000 442,446

3,692,446 104,925 (9,570)

103,523 (3,319,530)

Gain on sale of software IP 571,794

Sale of customer contracts

Following the sale of the Sonar/MyNet intellectual property in December 2016, FZO approached the Group with an offer to acquire the customer contracts associated with the intellectual property (Sonar/MyNet Customers) that had been sold to them in December 2016. Following detailed analysis and consideration of both the financial and operational impacts Tesserent completed the sale of customer contracts on 5th June 2017.

The underlying terms of the transaction was that FZO would commence invoicing the Sonar/MyNet Customers from the date of acquisition with any invoicing and cash received prior to the acquisition date remaining with the Group. Typically, a customer contract has a three-year term with invoicing occurring monthly, yearly or three years up front. Revenue is recognised evenly over the term of the contract as per the requirements of AASB 118 Revenue. The difference between the amount invoiced to a customer and what has been recognised as revenue is held on the balance sheet as unearned revenue. As at the date of the sale, the Group had $878,226 of unearned revenue associated with Sonar/MyNet Customers.

From the date of sale, the Group had no further customer servicing requirements to the Sonar Customers and


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therefore were in a position to recognise in the profit or loss the balance of the unearned revenue. The recognition of this unearned revenue was no longer associated with servicing Sonar/MyNet Customers but was directly linked to the sale of the Sonar/MyNet Customer contracts. On this basis the Group recognised the balance of the unearned income as contributing to the gain on sale of customer contracts.

Transaction summary is a follows:

2017

$

Value of customer contracts (wdv) (175,986)

Recognition of deferred revenue 878,226

Onerous contract value released1 31,855

Pay out agreed customer contract value (164,401)

Gain on sale of customer contracts 569,694

(1) From when the Group acquired the customer base from Blue Reef they were required to service customers including payment for third party

software used by the customers. Costs that were incurred from the date of acquisition up to and including the date of the first invoice to the

customer were classified as onerous expenses with a provision established as at the date of acquisition.

Impairment testing

For the purpose of impairment testing, intangible assets with indefinite lives are allocated to the consolidated entity’s cash generating units (CGU’s) as follows:

Consolidated

2017 2016

$ $

Software Licensing 777,375 777,375

777,375 777,375

The Group tests whether there has been any impairment on an annual basis. Impairment testing was performed at 30 June 2017 to support the carrying value of goodwill.

The estimated recoverable amount exceeded the carrying value for the CGU is as follows:

Consolidated

2017 2016

$ $

Software Licensing 576,060 1,219,760

576,060 1,219,760

Management believes that there are no reasonable possible changes to the key assumptions on which the recoverable amount of goodwill is based that would cause the CGU’s carrying value to exceed its recoverable amount.

Key estimate and judgment

The recoverable amount of the CGU’s is determined based on value-in-use calculations, determined by discounting future cash flows to be generated from the continuing use of the business. Management’s determination of cash flow projections and gross margins are based on past performance and future expectations which require the use of assumptions.

The calculations use cash flow projections based on current year actuals covering year 1. The present value of future cash flows for each CGU for years two to five have been calculated using a terminal growth rate of 2% and a pre-tax discount rate of 21.74% has been used to determine a value in use.


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3.7 Inventory

Inventory is stated at the lower of cost and net realisable value. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

As at 30 June 2017 there had been no write downs and all inventories are stated at cost. (2016:$nil)

4. Capital Management The Group’s objective when managing capital is to:

x Safeguard their ability to continue as a going concern, so that they can provide returns to shareholders; and

x Maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

For the purpose of analysis the Group defines capital as fully paid ordinary shares. 4.1 Borrowings


Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

The Group has no borrowings for the current year (2016:$nil)

4.2 Financial risk management

The Group’s activities expose it to a variety of financial risks: market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks, ageing analysis for credit risk.

Market risk

Foreign currency risk

The Group undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations.

Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity’s functional currency. The risk is measure using sensitivity analysis and cash flow forecasting. The risk is not significant as the Group has an immaterial amount of transactions denominated in foreign currency.

Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate as a result of changes in market interest rates.


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The table below outlines the variance interest rate on cash at bank.

2017 2016

Weighted average

interest rate

Balance Weighted average

interest rate

Balance

% $ % $

Cash at bank 1.31 2,860,648 2.03 3,380,740

Net exposure to cash flow interest rate risk 2,860,648 3,380,740

Sensitivity analysis

A change of 100 basis points in interest rates at the reporting date would have increased/decreased equity and profit/loss for the period by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for the comparative period.

Impact on profit/loss for the period

2017 2016

Increase in interest rates 21,869 14,167

Decrease in interest rates (21,869) (14,167)

Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date of recognised financial assets is the carrying amount of those assets, net of any provisions for impairment of those assets, as disclosed in consolidated statement of financial position and notes to the consolidated financial statements.

Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers including receivables and committed transactions.

Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisations, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Refer to Note 3.1 for schedule of unimpaired past due receivables.

The Group does not have any significant credit risk to any single counterparty given the large number of customers.

Liquidity risk

Prudent liquidity risk management requires the Group to maintain sufficient liquid assets and available borrowing facilities to be able to pay debts as and when they become due and payable.

The Group manages liquidity risk by maintaining adequate cash reserves and by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities.


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Amounts presented below represent the future undiscounted principal and interest cash flows.

Maturity analysis

Consolidated – 2017 1 year or less

Between 1 and 2 years


Over 5 years

Remaining contractual maturities

$ $ $ $ $

Non-interest bearing

Trade payables 720,392 - - - 720,392

Other payables 243,144 - - - 243,144

Accrued expenses 314,231 - - - 314,231

1,277,767 - - - 1,277,767

Consolidated – 2016 1 year or less



Over 5 years

Remaining contractual maturities

$ $ $ $ $

Non-interest bearing

Trade payables 549,825 - - - 549,525

Other payables 765 - - - 765

Accrued expenses 199,781 - - - 199,781

Deferred consideration 500,000 - - - 500,000

1,250,371 - - - 1,250,371

The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above.

Fair value of financial instruments

Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value.

4.3 Cash and cash equivalents


For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturity dates of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts.

Consolidated

2017 $

2016 $

Cash at bank 2,788,469 1,380,740

Term deposits 72,179 2,000,000

2,860,648 3,380,740

4.4 Contributed equity


Ordinary fully paid shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are show in equity as a deduction, net of tax, from the proceeds.

All issued ordinary shares are fully paid. Holders of these shares are entitled to dividends as declared from time to


Page 49

time and are entitled to one vote per share at General meetings of the Company. All ordinary shares rank equally with regard to the Company’s residual assets.

Consolidated

2017 2016 2017 2016

Shares Shares $ $

Ordinary shares – fully paid 116,774,600 115,334,600 10,140,892 9,917,792

Movements in ordinary share capital

Details

Date Shares Issue price

$

$

2016

Balance 1 Jul 2015 4,947,090 - 1,609,260

Conversion of Tesserent Australia Pty Ltd shares to Tesserent Limited shares

15 Jul 2015

15 Jul 2015

(4,947,090)

44,988,750

-

-

-

-

Shares issued to directors 24 Jul 2015 1,200,000 0.08 100,000

Shares issued to directors 4 Aug 2015 1,200,000 0.08 100,000

Shares issued to directors 18 Aug 2015 1,200,000 0.08 100,000

Shares issued to directors 27 Aug 2015 600,000 0.08 50,000

Shares issued on conversion of loan 11 Nov 2015 18,270,850 0.01 122,974

Shares issued pursuant to the capital raising

19 Feb 2016 35,000,000 0.20 7,000,000

Costs associated with the capital raising1

(992,692)

Shares issued on acquisition of business

14 May 2016 12,875,000 0.14 1,828,250

115,334,600 9,917,792 1Net of deferred tax assets

2017

Balance 1 Jul 2016 115,334,600 9,917,792

Shares issued to employees 30 Nov 2016 500,000 0.16 77,500

Shares issued to employees 8 May 2017 700,000 0.16 112,000

Shares issued to employees 15 Jun 2017 240,000 0.14 33,600

116,774,600 10,140,892


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4.5 Commitments

Information Technology and Communication (ITC) service commitments

The Group enters into contracts for the provision of ITC services with suppliers for which there are minimum spend requirements. Service commitments contracted at the end of the reporting period but which are not recognised as liabilities, are as follows:

Consolidated

2017 $

2016 $

Within one year 397,383 67,911

Later than one year but not later than five years 382,775 -

780,158 67,911

Lease commitments

The Group leases its offices under a non-cancellable operating lease which expires within the next year. Commitments in relation to this lease contracted for at the end of each reporting period but not recognised as liabilities, are as follows:

Consolidated

2017 $

2016 $

Within one year 222,723 40,500

Later than one year but not later than five years 1,477,852 -

Greater than five years 575,158 -

2,275,733 40,500

4.6 Dividends

No dividends were paid or declared for the current or prior period.

5. Other 5.1 Related party transactions Controlled entities The consolidated financial statements include the financial statements of Tesserent Limited and its controlled entities. The 100% controlled entities are as follows: Tesserent Australia Pty Ltd – acquired 15 July 2015 Tesserent Wholesale Pty Ltd – acquired 15 July 2015 Tesserent IP Pty Ltd (Previously 443 IP Pty Ltd) – acquired 15 July 2015 Tesserent UK Ltd – incorporated in the UK 20 May 2015 (dormant) Apart from Tesserent UK Ltd all companies operate in Australia.


Page 51

Options On 17 November 2015 the company issued the Chairman and each Non-Executive Director with a total of 7,500,000 options over unissued shares the details of which have been set out below: Director Options

exercisable from 31 August 2016

Options exercisable from 31 August 2017

Options exercisable from 31 August 2018

Steve Bertamini 500,000 500,000 500,000 Gregory Baxter 500,000 500,000 500,000 Paul Brandling 500,000 500,000 500,000 Russell Yardley 1,000,000 1,000,000 1,000,000 Exercise price $0.200 $0.240 $0.288 The options have been valued and accounted for in accordance with the requirements of AASB 2 Share-based Payments.

During the current period, no directors or parties related to the directors subscribed for shares in the company. Transactions in the prior year were as follows: Date Name Number of

Shares Amount Paid

15/07/15 Grand Floridian Pty Ltd* 31,100,000 Non-cash 15/07/15 RTSF Super Pty Ltd** 565,037 Non-cash 15/07/15 T.B.C (Australia) Pty Ltd** 7,591,557 Non-cash 03/09/15 Steve Bertamini 1,200,000 $100,000 03/09/15 Gregory Baxter 1,200,000 $100,000 03/09/15 Paul Brandling 1,200,000 $100,000 03/09/15 Russell Yardley 600,000 $50,000 08/11/15 RTSF Super Pty Ltd** 1,874,046 Non-cash 10/11/15 RTSF Super Pty Ltd** 1,250,000 Non-cash 11/11/16 RTSF Super Pty Ltd** 10,069,847 Non-cash 09/02/16 RTSF Super Pty Ltd** 790,774 Non-cash 09/02/16 T.B.C (Australia) Pty Ltd** 1,912,065 Non-cash 09/02/16 Grand Floridian Pty Ltd* 351,435 Non-cash *Related party to Keith Glennan

**Related party to Robert Langford former director

Payables – Loans from related parties

The Group has no loans from related parties in the current year (2016:$nil)

Key management personnel remuneration

Consolidated

2017

$

2016

$

Short-term salary/fees 1,024,688 487,501

Short-term-bonus 36,529 -

Post-employment benefits 77,696 29,583

Share based payments 677,358 235,774

1,816,271 752,858

Share based payments

Equity-settled share-based compensation benefits are provided to employees and directors.

Equity-settled transactions are awards of shares, or options over shares, that are provided to employees and directors in exchange for the rendering of services.

The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined


Page 52

using the Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the consolidated entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions.

The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods.

To determine the value of options issued, an independent valuation was prepared using the Black-Scholes model. In valuing the options a risk-free rate of 2%, a volatility rate of 40%, dividend yield of 0%, share price of $0.20 and time to expiry of four years were used. The 40% volatility rate was determined by reference to a broad set of ASX-listed comparable companies. The value as determined was amortised over the vesting period of the option. Set out below are summaries of options granted

2017

Grant date Expiry date

Exercise price

$

Balance at the start of

the year Granted Exercised

Expired/ forfeited/

other

Balance at the end of the year

17 Nov 15 31 Aug 19 0.20 2,500,000 - - - 2,500,000

17 Nov 15 31 Aug 19 0.24 2,500,000 - - - 2,500,000

17 Nov 15 31 Aug 19 0.288 2,500,000 - - - 2,500,000

9 May 16 8 May 18 0.30 500,000 - - - 500,000

9 May 16 8 May 19 0.40 500,000 - - - 500,000

9 May 16 8 May 20 0.50 500,000 - - - 500,000

Total 9,000,000 - - - 9,000,000

Weighted average exercise price $0.269 $0.00 $0.00 $0.00 $0.269

2016

Grant date Expiry date

Exercise price

$


the year Granted Exercised

Expired/ forfeited/

other


17 Nov 15 31 Aug 19 0.20 2,500,000 - - - 2,500,000

17 Nov 15 31 Aug 19 0.24 2,500,000 - - - 2,500,000

17 Nov 15 31 Aug 19 0.288 2,500,000 - - - 2,500,000

9 May 16 8 May 18 0.30 - 500,000 - - 500,000

9 May 16 8 May 19 0.40 - 500,000 - - 500,000

9 May 16 8 May 20 0.50 - 500,000 - - 500,000

Total 7,500,000 1,500,000 - - 9,000,000

Weighted average exercise price $0.243 $0.400 $0.00 $0.00 $0.269


Page 53

Set out below are summaries of deferred share rights issued during the year

2017

Grant date Vesting

date

Share price at

grant date

$


the year Granted Shares issued

Expired/ forfeited/

other


9 May 16 8 May 17 0.16 700,000 - (700,000) - -

9 May 16 8 May 18 0.16 700,000 - - - 700,000

9 May 16 8 May 19 0.16 700,000 - - - 700,000

16 Jun 16 30 Jun 17 0.17 250,000 - - (250,000) -

16 Jun 16 30 Jun 18 0.17 500,000 - - (500,000) -

16 Jun 16 30 Jun 19 0.17 1,000,000 - - (1,000,000) -

22 Oct 16 30 Nov 16 0.155 - 500,000 (500,000) - -

22 Oct 16 31 Mar 17 0.155 - 250,000 - (250,000) -

22 Oct 16 30 Jun 17 0.155 - 750,000 - (750,000) -

22 Oct 16 30 Sep 17 0.155 - 250,000 - (250,000) -

22 Oct 16 31 Dec 17 0.155 - 250,000 - (250,000) -

22 Oct 16 31 Mar 18 0.155 - 250,000 - (250,000) -

22 Oct 16 30 Jun 18 0.155 - 750,000 - (750,000) -

24 Nov 16 3 Oct 17 0.14 - 300,000 - - 300,000

24 Nov 16 3 Oct 18 0.14 - 450,000 - - 450,000

24 Nov 16 3 Oct 19 0.14 - 750,000 - - 750,000

24 Nov 16 15 Jun 17 0.14 - 240,000 (240,000) - -

24 Nov 16 15 Jun 18 0.14 - 360,000 - - 360,000

24 Nov 16 15 Jun 19 0.14 - 600,000 - - 600,000

Total 3,850,000 5,700,000 (1,440,000) (4,250,000) 3,860,000

2016

Grant date Vesting

date

Share price at

grant date

$


the year Granted Shares issued

Expired/ forfeited/

other


9 May 16 8 May 17 0.16 - 700,000 - - 700,000

9 May 16 8 May 18 0.16 - 700,000 - - 700,000

9 May 16 8 May 19 0.16 - 700,000 - - 700,000

16 Jun 16 30 Jun 17 0.17 - 250,000 - - 250,000

16 Jun 16 30 Jun 18 0.17 - 500,000 - - 500,000

16 Jun 16 30 Jun 19 0.17 - 1,000,000 - - 1,000,000

Total - 3,850,000 - - 3,850,000


Page 54

5.2 Reserves


The share-based payment reserve is used to recognise:

x the fair value of options issued to Directors and employees which have not been exercised;

x the fair value of shares issued to Directors and employees; and

x other share-based payment transactions.

The cost of shares and options over shares issued to Directors and employees are measured as set out in the related parties note in section 5.1.

Consolidated

2017

$

2016

$

Share based payment reserve

Opening balance 235,877 -

Share based compensation recognised during the year 692,570 235,877

Shares issued to employees (223,100) -

Closing balance 705,347 235,877

5.3 Parent entity information

The individual financial statements for the parent entity show the following aggregate amounts:

Consolidated

2017

$

2016

$

Statement of financial position

Current assets 1,798,641 3,511,987

Non-current assets 5,467,177 4,432,868

Total assets 7,265,818 7,944,855

Current liabilities 164,204 192,279

Total liabilities 164,204 192,279

Issued share capital 8,531,645 8,308,534

Reserves 705,347 235,877

Accumulated loss (2,135,378) (791,835)

Total equity 7,101,614 7,752,576

Included with non-current assets is a net intercompany receivable of $5,470,636 that the directors have deemed as recoverable from expected future cash flows.

Loss for the year 1,343,544 786,775

Contingent liabilities of the parent entity

The parent entity did not have any contingent liabilities as at 30 June 2017 or 2016.


Page 55

Guarantees entered into by the parent entity

The parent entity did not have any guarantees as at 30 June 2017 or 2016.

5.4 Remuneration of auditors

Consolidated

2017

$

2016

$

Audit and assurance services 96,000 90,500

Tax services 99,400 36,213

Total remuneration 195,400 126,713

5.5 Cash flow information

a) Reconciliation of cash flow from operating activities

Consolidated

2017

$

2016

$

Loss after tax for the year (3,464,036) (218,654)

Depreciation and amortisation 617,303 289,523

Share based payments 692,570 235,877

Initial public offering costs - 342,557

Bad debts 40,916 33,833

Gain on acquisition - (530,946)

Profit on sale of plant and equipment (29,751) -

Profit on sale software intellectual property (571,794) -

Profit on sale customer contracts (569,694) -

Loss on sale of shares 13,446 -

Increase in trade and other receivables (35,640) (211,583)

Increase in prepayments (71,631) (64,356)

Increase in inventory (61.171) (147,576)

Increase current tax asset (483,156) -

(Increase)/decrease in other assets (133,361) 237,919

Decrease/(increase) in deferred tax assets 197,412 (526,042)

Increase in trade and other liabilities 527,396 348,165

Decrease in current tax liabilities - (30,414)

Increase in unearned income 771,785 8,439

Decrease in current provisions (193,474) (48,922)

Net cash outflow from operating activities (2,752,880) (282,180)


Page 56

b) Non-cash investing and financing activities

Consolidated

2017

$

2016

$

Shares issued on conversion of loans - 733,827

Shares issued on acquisition of business (note 2.5) - 1,828,250

5.6 Events occurring after the reporting period

The directors are not aware of any significant events since the end of the reporting period.


Page 57

DIRECTORS’ DECLARATION In the opinion of the Directors’ of Tesserent Limited

a) the financial statements and notes, as set out on pages 22 to 56, are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2017 and of its performance for the year ended on that date; and

(ii) complying with Accounting Standards and the Corporations Regulations 2001 and other mandatory professional reporting requirements; and

(iii) as stated in note 1, the consolidated financial statements also comply with International Financial Reporting Standards

b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and

c) the Directors’ have been given the declarations required by s 295A of the Corporations Act 2001 for the financial year ended 30 June 2017.

d) the remuneration disclosures included at pages 11 to 20 of the Directors Report (Audited Remuneration Report) for the year ended 30 June 2017 comply with section 300A of the Corporations Act 2001

Signed in accordance with a resolution of the Directors’ made pursuant to section 295(5) of the Corporations Act 2001.

On behalf of the Directors,

Keith Glennan

Director


Collins Square, Tower Four Level 18, 727 Collins Street Melbourne VIC 3008 GPO Box 5099 Melbourne VIC 3001 Australia

Tel: +61 3 9603 1700 Fax: +61 3 9602 3870 www.bdo.com.au

BDO East Coast Partnership ABN 83 236 985 726 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO East Coast Partnership and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees.

INDEPENDENT AUDITOR'S REPORT

To the members of Tesserent Limited

Report on the Audit of the Financial Report

Opinion

We have audited the financial report of Tesserent Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial report, including a summary of significant accounting policies and the directors’ declaration.

In our opinion the accompanying financial report of the Group, is in accordance with the Corporations

Act 2001, including:

(i) Giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its financial performance for the year ended on that date; and

(ii) Complying with Australian Accounting Standards and the Corporations Regulations 2001.

Basis for opinion

We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial

Report section of our report. We are independent of the Group in accordance with the Corporations

Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.

We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Page 58

Page 59

Acquisition of Blue Reef Pty Ltd (Blue Reef) and subsequent sale of software intellectual property (software IP) and other assets to Family Zone Cyber Safety Limited (Family Zone)

Key audit matter How the matter was addressed in our audit

As detailed in Note 2.5, the Group finalised its provisional accounting for the acquisition of Blue Reef during the year and subsequently sold acquired software IP and other assets to Family Zone, which is detailed in Note 3.6. The sale of software IP to Family Zone during the year ended 30 June 2017 provided the Group with a fair value determination of the software IP to finalise the provisional accounting of the assets acquired. This resulted in a retrospective adjustment to the value of Goodwill, resulting in a bargain purchase gain at 30 June 2016 and a gain on the sale of software IP during the year ended 30 June 2017. In May 2017, there was a further sale agreement entered into with Family Zone to sell the customer contracts and equipment. This is a key audit matter due to it requiring significant interactions between the audit team and management; the complexity of the accounting and disclosures; and the material nature of the balances discussed.

Our audit procedures included, amongst others: x Read the purchase and sale agreements to

understand the terms and conditions of the acquisition and subsequent disposals of assets and evaluating management’s application of the relevant accounting standards.

x Assessed the finalisation of the provisional accounting by reviewing the mathematical calculations for the retrospective adjustment to Goodwill.

x Assessed the correct tax treatment of the deferred tax liability (DTL) recognised, as a result of the change in value of the software IP, through consultation with a tax expert.

x Tested management’s calculation of the consideration received which included agreeing the Family Zone’s shares received to the ASX quoted price on the date of sale, and the cash received to the bank statements.

x Reviewed the calculation and accounting treatment associated with the sale of customer contracts and equipment in reference to the sale agreement.

x Assessed the recoverability of the net receivable at 30 June 2017 from Family Zone.

Impairment of Goodwill

Key audit matter How the matter was addressed in our audit

As disclosed in Note 3.6, the Group has a Goodwill balance of $777,375 relating to the Software Licensing Cash Generating Unit. The Group is required to perform an annual impairment test of Goodwill balance in accordance with Australian Accounting Standards. This is a key audit matter as the annual impairment test was significant to our audit because the balance is material to the financial statements. In addition, management’s assessment process is complex and highly judgmental and is based on assumptions, which are affected by expected future market or economic conditions.

Our audit procedures included, amongst others: x Evaluated the assumptions and

methodologies used by management, in particular those relating to the forecasted cash flows and discount rate.

x Challenged management’s assumptions used in the impairment assessment, including those relating to forecast revenue, cost, capital expenditure, discount rate and corroborated the key market related assumptions to external data.

x Used our valuation specialists to critically assess management’s discount rates based on external data where available.

x Assessed the historical accuracy of forecasting and performed a sensitivity analysis on the discount rate, forecasted revenue and terminal growth assumptions on the Cash Generating Unit.

x Reviewed the adequacy of the Group’s disclosures in the financial statements about those assumptions to which the outcome of the impairment test is most sensitive, that is, those that have the most significant effect on the determination of the recoverable amount of the Goodwill.

Page 60

Other information

The directors are responsible for the other information. The other information comprises the information contained in the Directors’ Report for the year ended 30 June 2017, but does not include the financial report and our auditor’s report thereon, which we obtained prior to the date of this auditor’s report, and the Annual Report, which is expected to be made available to us after that date.

Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

When we read the Annual Report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and will request that it is corrected. If it is not corrected, we will seek to have the matter appropriately brought to the attention of users for whom our report is prepared.

Responsibilities of the directors for the Financial Report

The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.

In preparing the financial report, the directors are responsible for assessing the ability of the group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the Financial Report

Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report.

A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website (http://www.auasb.gov.au/Home.aspx) at:

http://www.auasb.gov.au/auditors_files/ar2.pdf

This description forms part of our auditor’s report.

Page 61

Report on the Remuneration Report

Opinion on the Remuneration Report

We have audited the Remuneration Report included in pages 11 to 20 of the directors’ report for the year ended 30 June 2017.

In our opinion, the Remuneration Report of Tesserent Limited, for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001.

Responsibilities

The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

BDO East Coast Partnership

David Garvey Partner


Tesserent Limited Financial Report FY17 Signed

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